Further Rate Cuts Ahead

The Bank of Zambia will continue to cut its key policy rate over 2017, after having reduced rates for the first time in five years in February. Inflation will remain in single digits over the year, and this will enable the central bank to take a more dovish monetary policy stance.

We expect the Bank of Zambia (BoZ) will enter a gradual rate-cutting cycle over 2017 as inflation remains within the central bank's target of 6.0%-8.0%. We had previously anticipated the BoZ would cut its policy rate by 50 basis points (bps) in H117 and a further 100 bps in H217, but the central bank reduced its policy rate by the full 150 bps to 14.0% at its February Monetary Policy Committee meeting. This marks the first time since 2012 that the BoZ reduced its policy rate and we see increasing scope for further cuts this year, with the bank likely cutting rates by a further 100 basis points to 13.0% by end-2017. In addition, the BoZ reduced its statutory reserve ratio by 250bps to 15.5% as well as its overnight lending rate from 1,000 to 600bps above the policy rate, affirming the bank's move towards more dovish policy.

Rate Cuts Signals Start To Easing Cycle

Zambia - Central Bank Policy Rate And Consumer Price Inflation

Source: BoZ, BMI

Price Stability Will Encourage Rate Cuts

Inflationary pressures will remain largely contained in Zambia over the next several months and this will enable the BoZ to take a more accommodative policy stance. Price growth peaked at 22.9% y-o-y in February 2016 but has eased substantially in recent months, coming in at 6.8% in February 2017. While food supply in Zambia remains at risk owing to an outbreak of army worms ( see 'Army Worms And Adverse Weather Will Pose Upside Risks To Inflation', February 16) we expect food supply to improve over the next several months.

Further Loosening Ahead

Zambia - Consumer Price Inflation And Central Bank Policy Rate

e/f= BMI estimate/forecast. Source: BoZ, CSO, BMI

Subdued Growth Will Encourage Dovish Policy

With growth having slowed down considerably in the wake of the global commodity price slump, the BoZ will continue to reduce its policy rate in an effort to stimulate the economy. While growth will pick up over 2017, it will remain well below the annual average of 7.6% per year between 2004 and 2014. Indeed, the central bank stated that the economy continued to face challenges in Q416 and we expect the bank's primary focus will be on stimulating weak growth in the coming year.